IRS Notice of Deficiency

What Should I Do If I Receive an IRS Notice of Deficiency?

Key Takeaways:

• The IRS sends Notices of Deficiency to taxpayers with unfiled returns or unreported income on their returns.
• The letter proposes a tax due and gives you 90 days to respond.
• If you disagree, you must respond by the deadline and explain why. 
• If you don’t respond, the IRS will assess the taxes against you.
• Your next steps depend on whether or not you agree with the IRS’s proposed changes

While receiving a notice of deficiency can cause immediate panic and worry, it’s important to stay calm and read the notice in full before responding. The good news is that the IRS generally gives you the information you need to make an informed decision–they tell you why there’s a deficiency, what your options are, and what will happen if you do not respond. Start by reading your notice in full, verifying that it is addressed to you, and taking note of your options.

This notice could mean you owe the IRS money, but there’s also the possibility that the IRS is wrong in concluding you have an unpaid tax bill. Regardless of your situation, the last thing you want to do is ignore the notice of deficiency. Let’s take a look at what it means to receive a notice of deficiency and what you should do if you get one. 

What Is an IRS Notice of Deficiency? 

Sometimes referred to as a “statutory notice of deficiency,” this notice means the IRS believes you underpaid your taxes. The IRS usually reaches this conclusion because the information on your tax return does not match the information the IRS has on file. 

However, the agency may also send a notice of deficiency if you did not file a tax return at all, despite employers or other parties sending the IRS proof of income you earned. When this happens, the IRS will file a substitute for return and send you a notice of deficiency for what they believe you owe.

For example, you might have forgotten to report income from a particular employer, but that employer still sent a W-2 to the IRS. Because the IRS knows about income you didn’t report, the IRS may think you owe taxes.

One thing to keep in mind about the notice of deficiency is that it’s not a bill. Instead, it’s the IRS’s way of telling you that it has information that will affect your tax liability. It also gives you the chance to explain why you think the IRS is wrong. This could include providing additional information to the IRS or filing a petition with the U.S. Tax Court.

If you receive a notice of deficiency, you likely should have received an earlier letter or notice indicating the IRS believes there’s a problem with your taxes. For instance, an individual taxpayer might first get a CP2000 Notice, which the IRS sends when there’s a discrepancy between the information provided on a tax return and information reported to the IRS by third parties. 

What if your deficiency is due to you not filing a tax return at all? The IRS should send you a substitute for return with a 30-day response window first. If you do not respond, then they will assume that you agree with your calculations and move forward with a notice of deficiency. At that point, you have an additional 90 days to respond before the assessment becomes final.

The Different Types of IRS Notices of Deficiency

There are several different kinds of IRS deficiency notices. While they all concern the same thing – the IRS believes you have unpaid taxes – they come up in different contexts. Here is a list of some of the more common letters and notices of deficiency the IRS sends out: 

• Letter 531: The IRS sends this when they believe that you owe additional taxes for the tax years indicated in the letter. They generally give you 90 days to petition the Tax Court.
• Letter 902: This is a notice of deficiency that involves estate taxes.
• Letter 3219: The IRS sends this letter after a correspondence audit in which they were unable to verify the amounts you reported. As a result, they adjust your tax return and send you a bill for the new amount due.
• Notice CP3219A: A common type of notice of deficiency that the IRS sends when it has information that contradicts what’s been reported on an individual’s tax return. The IRS will also send Form 5564 should you wish to agree with their assessment.
• Letter CP3219B: Similar to Notice 3219A, but gets sent to business taxpayers.
• Notice CP3219N: A taxpayer will receive this notice if they never filed a tax return, but the IRS has information indicating the taxpayer still has reportable income.

For many individual taxpayers, Notice 3219A will be the notice of deficiency they’re most likely to encounter. Sometimes this document will go by other names, such as Letter CP3219A: Statutory Notice of Deficiency.

What You Should Do If You Receive IRS Letter CP3219A

The first thing you do if you get this notice is to read it carefully. Make sure you understand how and why the IRS got to the conclusion that you owe them a certain amount of money. For example, if the IRS writes that you forgot to report a source of income, you need to be aware of that income source, and you also need to be sure that the amount of income the IRS thinks you didn’t report is also correct. 

If there are any discrepancies, take note of them so you can address them in a deeper review of your tax return or with the help of a tax professional.

To better understand why the IRS is claiming that you owe more money, you may want to go over your notice with a copy of your tax return to look for any issues in reported income, credits, or deductions.

After looking over the notice and any accompanying paperwork, you’ll have to respond to it. There are several ways you can do so. Here’s an overview based on the situation:

If you agree with the tax due shown on the notice 

First, if you fully agree with the IRS that you owe them additional money in taxes, you can sign Form 5564 – Notice of Deficiency Waiver and return it to the IRS by mail or fax. 

The address and fax number should be in the notice of deficiency letter. You can also enclose your payment with Form 5564. If you can’t afford to pay the entire tax bill at this time, you can work with the IRS to create a payment plan or installment agreement.

If you disagree with the tax due shown on the notice

Second, if you disagree with the IRS, even partially, you’ll sign and return Form 5564, but instead of attaching payment, you’ll attach additional information explaining and supporting your position that you believe the IRS is mistaken. When sending documents to provide this information, remember to do the following:

• Send copies, not originals.
• Prepare and sign a statement explaining why you think the IRS is wrong and how the documents you’ve attached support your position.
• Put your name, tax year, and Social Security number on each page you send the IRS.

If you go with this second option, you want to work as quickly as possible with the IRS to resolve this tax disagreement. You need to move quickly because you only have 90 days from the date of the notice of deficiency letter to challenge the IRS in Tax Court.

You don’t have to go to court to resolve the notice of deficiency with the IRS. However, if discussions with the IRS are unsuccessful and you decide to litigate the tax disagreement, you’ll have to go to the U.S. Tax Court. And the IRS is not allowed to extend this 90-day deadline.

If you want to petition the Tax Court about the issue 

Your third option when receiving a notice of deficiency is to file a petition with the U.S. Tax Court. You typically have a little less than 90 days to do so, as the 90-day deadline clock starts when the IRS sends you the notice of deficiency. This is why the notice of deficiency is often called a “90-day letter.” 

One exception to this 90-day rule is if you’re outside of the United States. In that case, you’ll have 150 days to file a petition with the U.S. Tax Court.

You have two ways to file a petition. You can download a form from the U.S. Tax Court’s website, then mail it or drop it off in person. You can also complete and file the petition electronically through the DAWSON electronic filing system.

Paying Under Protest

If you go this route, you pay the tax debt while still disagreeing that you owe it. After making your payment, you file a claim for a refund and provide detailed documentation on why you did not actually owe the tax amount in question. If this option appeals to you, you should discuss it with a tax professional to understand your odds of succeeding and getting a refund.

Making a 6603 Deposit

Another option is to make a 6603 deposit. Making a payment allows you to stop interest from accruing on your tax bill, and if the assessment does not become final, you can reclaim your deposit. 

Requesting an Audit Reconsideration

Those who received a notice of deficiency due to an audit may request an audit reconsideration. This option may make sense for you if you have new information to present to the IRS or the auditor missed relevant information during their audit. Note that this option is not available to you if you have already paid your taxes in full or accepted that the debt is accurate.

Requesting the IRS Withdraw the Notice of Deficiency

The above-discussed 90-day deadline to file a U.S. Tax Court petition sometimes presents a practical problem for some taxpayers and the IRS. A good example is when the notice of deficiency is the result of taxpayer identity theft, which can easily take months to resolve. Here’s what can sometimes happen.

The IRS believes a taxpayer underpaid their taxes. The IRS sends out a notice or letter to the taxpayer explaining the issue and providing the taxpayer a chance to explain the potential underreporting of income. The taxpayer believes the IRS is wrong and sends information to explain why.

While the IRS is processing the new information and before it can make a decision, a notice of deficiency automatically gets generated and sent to the taxpayer. This creates a dilemma for the taxpayer because once the notice of deficiency letter gets mailed, the 90-day clock starts ticking and the taxpayer only has 90 days to decide if they will file a U.S. Tax Court petition.

If the IRS and taxpayer can resolve their disagreement, there’s no need to spend the time and money of litigating in court. Unfortunately, there’s no way to know if the IRS will make a decision before the 90-day deadline and if so, if the decision will be in the taxpayer’s favor.

So in an abundance of caution, the taxpayer files a petition with the U.S. Tax Court. This is bad for everyone. The taxpayer has to spend the time and money filing a petition and preparing for a Tax Court hearing. The IRS has to respond to the petition and also prepare for the potential hearing. And the Tax Court must process a case that could very well get resolved without its intervention.

To deal with these potential situations, a taxpayer can sometimes ask the IRS to withdraw or rescind the notice of deficiency. To make this request, the taxpayer should complete Form 8626, Agreement to Rescind Notice of Deficiency. There are three scenarios where the IRS will sometimes grant this request:

• The taxpayer can show that they don’t owe the IRS any unpaid taxes.
• The notice of deficiency is the result of a clerical or administrative mistake.
• The IRS and the taxpayer are entering into settlement negotiations.

What Happens If You Don’t Respond to a Notice of Deficiency?

Failing to respond to a notice of deficiency is the worst way to handle this situation, as you essentially waive your right to dispute the amount. If you do not respond within 90 days–or 150 days if you are outside the country–the IRS will assume that you agree with their proposed changes and move forward with sending you additional bills. If you continue to ignore communication from the IRS, their collection efforts may escalate to include liens, levies, and wage garnishments.

Filing or Amending Your Tax Return

If the notice of deficiency alerted you to issues within your tax return or to the fact that you did not file a tax return at all, you may still be able to make changes. You likely do not need to amend your tax return if you agree with the IRS’s proposed changes; you’ll end up with the same tax bill and spend unnecessary time on an amended tax return. But if their amendments left out important deductions or credits, you may want to amend your tax return so you can decrease your tax liability.

Should your notice of deficiency be the result of an unfiled tax return, you’ll almost certainly benefit from filing your own tax return. When the IRS files a substitute for return, they simply take the information provided to them by third parties and base your taxes owed on that. They do not account for any credits or deductions that could decrease your tax bill. By filing your own tax return, you may see a significant decrease in your tax bill.

Need Help Responding to a Statutory Notice of Deficiency? 

If you’ve received a notice of deficiency and agree with it, go ahead and sign and return Form 5564 to the IRS. But if you think the IRS made a mistake, feel free to contact the W Tax Group and one of our attorneys or other tax professionals can help. We can also help you set up payment plans, apply for penalty relief, and consider settlements if you do agree with the tax liability.